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Don’t Just Shift Burden of Government, Reduce It!
An Open Letter to Ohio Governor John Kasich:
June 5, 2012
Dear Governor Kasich:
On behalf of the National Taxpayers Union’s 13,500 members in Ohio, I write to commend you for initiating a healthy debate on reducing income tax burdens in the state. However, NTU strongly cautions against any package that achieves this worthy goal at the expense of levying punitive tax increases on targeted businesses.
Thanks in part to your leadership, Ohio has begun a tentative but palpable recovery from the recession. Last month, unemployment dropped to 7.4 percent, below the national average, and the state enjoyed its ninth straight month in which the unemployment measurement has receded. However, Ohioans pay almost 10 percent of total income in state and local tax burdens, the 18th-highest in the nation according to the Tax Foundation. Amongst your neighbors, only Pennsylvania imposes a heavier load on its citizens. Reducing the state’s income tax should be a key part of any tax reform to ease the bite on residents and make Ohio more competitive.
The economic record is clear: states with low income taxes have higher overall growth. Ohio has experienced the reverse of this after it first levied an individual income tax in 1972. Since then, the state’s contribution to U.S. GDP dropped from 5.4 percent to just 3.28 percent. This decline is also reflected in the flight of residents who left for other states with better job opportunities. In light of those facts, a proposal to reduce the state’s income tax by up to $1 billion over five years would normally be praiseworthy. Unfortunately, the proposal you have crafted would cancel out many positive effects of an income tax reduction by enacting harsh tax hikes on the oil and natural gas industry. By singling out Ohio energy production for higher taxes, your plan imperils development of a key sector of the economy that could provide thousands of new jobs and a windfall in state tax receipts.
Increasing severance taxes on specific types of wells will limit growth in a largely prospective industry. According to a September 2011 economic impact study by Kleinhenz Associates, development of the Utica Shale using existing tax structures will create a financial boon for Ohio. The study estimates new developments will generate over 200,000 jobs in the state, increasing output by over $22 billion and taxable wages by over $12 billion. Furthermore, each well drilled will generate state and local income taxes, as well as proceeds from a commercial activity tax and the existing severance tax. The proposal to hike the severance tax four-fold on hydraulically fractured wells jeopardizes much of these potential benefits.
There is a better, more fiscally responsible way to achieve income tax cuts: trimming back wasteful spending to reduce the burden of government. In 1990, general fund expenditures for Ohio stood at just under $11.6 billion. By 2009, they had grown to roughly $27 billion, an increase of 131 percent. Even adjusting for inflation, Ohio’s budget swelled by a staggering 41 percent. If Ohio’s political leaders simply had restrained spending to annual inflation plus population growth over that period, Ohio’s general fund expenditures in 2009 would have been roughly $7.5 billion less. By comparison, in Fiscal Year 2010, total state and local individual income tax collections amounted to $7.88 billion. In other words, modest spending restraint in recent years could have provided enough fiscal latitude to nearly eliminate the state income tax in its entirety.
The time for reducing Ohio’s onerous income tax is ripe, but lawmakers should look to do so without resorting to tax increases elsewhere – increases that will ultimately prove counterproductive to the brighter future you seek for your state. We urge you to abandon energy tax hikes and instead pursue common-sense trims to spending.
Sincerely,Andrew MoylanVice President of Government Affairs